In the way that driving with your eyes closed is dangerous, so is acquiring customers without knowing what it costs you to acquire them. Both have disastrous outcomes.

Whilst acquiring new customers is always something to be happy about, it doesn’t mean you should throw out common sense in how you account for your time and human resource you spent in acquiring them. These combined are referred to as your CAC (customer acquisition cost).

Startups understand that if they pay Google for advertising, that should be included in their CAC, but many other items add up as part of the CAC that is less obvious.

You might feel you have ‘acquired’ your new customer for ‘free.’ When you account for the additional effort outside of direct money out of your pocket, you might find that your new user is costing you more to acquire than you are charging them.

Thus, you unwittingly created an imbalance in your company’s cash-flow.

When your cost to acquire customers (CAC) exceeds the lifetime value of customers (LTV), then your startup is getting ready for the last post.

In this article, we will explain the CAC in more detail, how you can measure it, and what steps you can take to improve it.

How you can measure your CAC
You get your CAC when you divide all marketing expenses by the number of customers acquired in the period the money was spent. For example, if a company spent N10,000 on marketing in a year and acquired 100 customers in the same year, their CAC is N100.

What about CAC per marketing channel?
Knowing the CAC for each of your marketing channels is what most marketers crave. If you know which channels have the lowest CAC, you know where to double down on your marketing spend. The more you can allocate your marketing budget into lower CAC channels, the more customers you can obtain for a fixed budget amount.

The simple approach is to break out your spreadsheet and gather all your marketing receipts for the year, quarter or month. Then add up those amounts by channel.

Segmenting Your Payments
For example, how much did you spend on Google Adwords and Facebook advertising?

In this case, you might put this in a column called “PPC” or “Pay-Per-Click”. How much did you spend on SEO and blogging? This might go into a column called “Inbound Marketing Costs”.

Now that you know how much you spent on each channel, you can apply a simplistic formula and assume each channel “worked” to get the same amount of customers as the next channel. This would be an averaging method.

The only issue is that it can be difficult to know what channel is responsible for which customers.

For an e-commerce company that sells physical products, it’s easy to know what Pay-Per-Click advertisements lead to direct sales because of the conversion tracking the advertising platform provides.

In this case, you can determine that value and note this in your spreadsheet. This will give you a better idea of how your Pay-Per-Click campaigns are doing relative to the rest of your marketing spend.

Also, with analytic tools like KISSmetrics you can trace paying customers back to their “last touch” attribution source. This means you can see the last channel the customer visited before doing their first sales with your online business.

Now, this is where marketing gets philosophical.

One school of thought is that each marketing channel supports the next channel – it’s a combined effort. Your blog posts reinforce your Pay-Per-Click ads, and all channels work together to bring in customers.

This is a common notion in outdoor advertising. Billboards reinforce T.V. campaigns, which reinforce radio spots and so on. Ultimately it comes down to your own company’s philosophy on how to attribute customer acquisition. If you feel that last touch is “good enough” you can use that model for your CAC calculations.

However, you may have wildly popular viral videos or a blog that drives a lot of word-of-mouth referrals. These obviously support your overall marketing efforts and tend to be more difficult to track and attribute to customer acquisition.

How you can improve CAC relative to LTV
The reality is that your advertising campaigns can always be more effective. Your LTV and can always come out more robust than your CAC. There are several methods your business can use to improve its CAC in its industry.

One way is to improve on-site conversion metrics. Set up goals on Google Analytics and perform A/B split testing with new checkout systems in order to reduce shopping cart abandonment rate and improve the landing page.

Also, enhance user value. By the highly conceptual notion of “user value,” we mean the ability to generate more value from a single customer.

This may be upselling additional features or implementing something to improve the existing product for greater positioning.

Finally, tighten up your customer relationship management. Nearly all successful companies that have repeat buyers implement some form of CRM. This may be a complex sales team using a cloud-based sales tracking system, automated email lists, blogs, loyalty programs, and/or other techniques that capture customer loyalty.

The general idea is if you can’t retain customers, acquiring more won’t keep your startup from dying.

Featured image via strategisadv

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Growth is the only essential thing you need to be a startup. Startups are created to grow fast. Everything else that happens within a startup is a derivative of growth.

Everything – ideation, product validation, product management, team building, fundraising – follows from growth. Without growth, early stage startup is just a small business losing money.

That is why founders are encouraged to focus on one metric – the one that matters. This is because, as a startup, your limited resources are a deterrent to wasting your time trying different things.

Depending on your type of business, growth will mean different things to different startups. And your one metric that matter changes over time. Getting rid of distractions enables you to focus your already limited resources – people, time, and money – on the one thing that moves the needle.

What is the one thing that signifies that your business is growing at a particular point in time?

In the beginning, growth for a lot of startups has more to do with user acquisition and engagement than revenue. The advantage of defining your growth metric is it tells you the most important thing about your startup and how should drive it.

You need to consider the followings when choosing your growth parameter.

1. Your business model

The way you monetize your product is an indication of the value that will be created by your business. It’s not always about the money, but revenue metrics provides a standard benchmark for growth metrics.

2. How you acquire your customers

The rate at which your products gets into the hands of users is a substantial measure of how scalable and successful your product can be. Inherent in the DNA of startups is the ability to build products that have the potential of being ubiquitous and viral within a short time frame.

That is why most startups are tech-enabled companies because technology enables innovation not just in the way products are made, but how they are distributed. You can measure your growth based on metrics such as unique web visits, page views, app downloads, partner signups, user signups, conversion rate, churn rate, etc.

3. The stage of your business

The stage of your company will determine what to focus on. Early stage business should be obsessed about metrics that validates their product-market fit more than mid or late stage companies.

In the beginning, your growth metric is based on time-based milestones you need to reach such as partnerships, signup at a particular time, user signup rate, number of feature releases, etc. It is important that you wrap this with specific numbers as much as possible to measure progress.

4. How you measure growth

Answering this question will help you make right decisions. Let’s assume you decide to measure your growth by the number of subscribers to your email list. First, you’ll have to optimise your product, website, app, content and every potential user interactions to grow this list.

You then measure the results of all your actions on a regular basis against this metric. You hold yourself and your team accountable with data and see whether you are making progress or not. You deep dive into all your acquisition channels to identify where you are getting the most number of subscribers. You look at the numbers every day and experiment with various tactics and tools to see how you can grow the subscription rate.

As you focus on a particular growth metric and optimise your products accordingly, magic happens. You identify particular big hairy destinations to drive your startup towards and you can measure the how and the rate at which you are getting there. And as you grow, your goal may change, and you redefine your growth metric.

You build, you measure, you learn.  And you continue the cycle until you reach your true north.

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